Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627

Facts

  • The rule of separate corporate personality established in Salomon v A Salomon & Co Ltd means that a company is legally distinct from its shareholders.
  • Lonrho Ltd v Shell Petroleum Co Ltd concerned whether the parent company, Shell Petroleum, could be held responsible for the actions of its subsidiaries.
  • The subsidiaries were alleged to have supplied oil to Rhodesia in breach of sanctions, with the plaintiff arguing the parent company was accountable due to its ownership and control.
  • The House of Lords examined whether the actions or knowledge of the subsidiary could be attributed to the parent company, focusing on possible exceptions to the rule of separate corporate personality.

Issues

  1. Whether a parent company can be held liable for the actions of its subsidiary despite the rule of separate corporate personality.
  2. Whether an agency relationship existed between Shell Petroleum and its subsidiaries, such that the subsidiaries’ actions could be attributed to the parent.
  3. Whether the subsidiaries acted as mere covers or facades for the parent company, justifying disregard of their separate legal personalities.

Decision

  • The House of Lords reaffirmed the principle of separate corporate personality: each company in a corporate group, including subsidiaries and the parent, is a distinct legal entity.
  • Mere ownership and control of a subsidiary by a parent company is insufficient to pierce the corporate veil or assign liability to the parent.
  • The court held that an agency relationship could only be established if there was clear proof that the subsidiary was authorized to act as agent and was under control of the parent company.
  • The "facade" exception applies only where a subsidiary is used solely to conceal the parent company’s activities or evade legal obligations; this requires compelling evidence of improper purpose.
  • On the facts, the subsidiaries operated as independent businesses, and there was insufficient evidence of agency or mere façade; the parent company was not liable for their actions.

Legal Principles

  • The separate corporate personality of each company is a fundamental principle, shielding parent companies from liability for their subsidiaries’ obligations and actions.
  • An agency relationship between parent and subsidiary must be clearly established with evidence of authority and control.
  • The "facade" or cover exception permits the court to disregard a company’s separate personality only when used improperly to avoid obligations or conceal conduct.
  • Mere control or ownership does not suffice to lift the corporate veil.

Conclusion

The House of Lords in Lonrho Ltd v Shell Petroleum Co Ltd confirmed that parent companies are generally not liable for their subsidiaries’ actions unless clear evidence of agency or use of subsidiaries as facades is established, maintaining the primacy of separate legal personality within corporate groups.

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